The "endless bid" in crude oil is setting up a fantastic opportunity in natural gas stocks.
is what I've begun to call the inexorable and uncontrolled desire of investors to buy crude oil.
Through commodity index funds and particularly oil exchange-traded funds, investors have bought futures and bid up the price of oil to levels unsupported by the underlying supply and demand fundamentals.
Double-long ETFs, giving investors and traders a double hit of caffeine for their speculation dollar, have made the situation doubly worse. Crude oil seems to know only one way to travel -- up. Even when it takes a rest from its upswings and has a down day, you can feel the bid underneath the market, hungry for exposure, buying all the dips.
Top 5 Natural Gas Stocks
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Natural gas so far hasn't excited investors to the same degree. This is because the access of natural gas to traders isn't nearly as universal. The indexes devote a much, much smaller percentage of their exposure to nat gas, and the ETFs like
United States Natural Gas
are puny by comparison to the oil ETFs like
United States Oil
. Less interest means far, far less of a bid, and far from an endless one.
Oil has rocketed to the $72 dollar range, while nat gas has languished near $4 an mMbtu (or 1,000 British thermal units). At these levels some other practical fundamentals will come into play. The ability for some utilities and other end-users of energy to switch easily back and forth from crude oil-based sources of energy to natural gas is called cogeneration. As oil moves up while natty stays cheap, the companies with that ability are looking to lock in relatively inexpensive long-term prices in natural gas and make the switch.
Even consumers still running heating oil in their homes will look carefully at switching out for natural gas if the prices for oil stay this high.
The curve of natural gas prices -- or the set of prices being traded forward in time -- is showing that this is already starting to happen, or at least traders are expecting it to happen. While price for prompt August delivery is trading at $4.30, December 2009 is trading at close to $6 and December prices for 2010 are trading well over $7.
That means there's an excellent opportunity setting itself up here in natural gas stocks. This group has been mercilessly beaten down over the last year but didn't participate much in the big rally from the
lows because of the depressed price of natural gas.
But the curve is telling us that nat gas prices are going to rise this winter and into 2010 (they're already trading there). And those natural gas stocks that are the most sensitive to natural gas prices are going to benefit the most to that "built in" rise in prices to come.
The whole sector should benefit, but the most-liquid stocks include
The most conservative of these names, like Anadarko and XTO, will be the least volatile in a longer-term holding, while you could go for my favorite (and usually most wildly swinging) Chesapeake.
If you want, there are a number of natural gas sector indexes you can look at. My favorite is the Amex natural gas index, or XNG. However, I can't recommend the direct futures ETF like UNG -- the roll problems won't allow you to capture the full move in the futures market. If you want to play futures directly, then buy futures.
But anyway you play it, if the endless bid in crude oil continues, you're sure to do well investing now in natural gas.
And there's no reason to believe that the endless bid is disappearing anytime soon.
At the time of publication, Dicker was long Chesapeake Energy, but positions can change at any time.
Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.
Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.
Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.
Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.